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How relative marginal tax rates affect establishment entry at state borders

Author

Listed:
  • Yulong Chen

    (Central University of Finance and Economics)

  • Kevin D. Duncan

    (Federal Housing Finance Agency)

  • Liyuan Ma

    (Iowa State University)

  • Peter F. Orazem

    (Iowa State University)

Abstract

We apply border discontinuity analysis to measure the impact of marginal tax rates on capital income, property, sales, and income on establishment entry on either side of state borders. Establishments are more likely to enter on the side of the border with the lower marginal tax rates. The biggest differences in start-up rates are at borders with the largest tax rate differences, with property tax rate differences mattering most. We rank borders by the differences in start-ups due to tax structure, and we rank states by their distortionary tax structures. The greatest distortion in start-ups due to tax rates is at the Wyoming-Idaho border with an 8.6% lower probability of start-ups on the Idaho side. The most distortionary tax structure is Rhode Island’s at 14.2% lower probability of entry, but it is not as heavily disadvantaged at the border because its neighbor, Connecticut, has the third most distortionary tax structure.

Suggested Citation

  • Yulong Chen & Kevin D. Duncan & Liyuan Ma & Peter F. Orazem, 2023. "How relative marginal tax rates affect establishment entry at state borders," Small Business Economics, Springer, vol. 60(3), pages 1081-1103, March.
    • Handle: RePEc:kap:sbusec:v:60:y:2023:i:3:d:10.1007_s11187-022-00624-7
    DOI: 10.1007/s11187-022-00624-7
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